Despite intensified warnings from Japanese authorities, the yen appears poised to lose further value to the US dollar as market participants are unfazed by the threat of intervention in the currency markets.
Even if such an intervention becomes a reality to stop the decline of the yen, there is a good chance that it will be just a drop in the ocean and will not do much to reverse the trend of a strong dollar, unless the Bank of Japan changes its dovish stance, an unlikely scenario. , say market analysts.
The yen has already broken through past barriers considered psychologically important to market participants and the defense lines of Japanese authorities, including BOJ Governor Haruhiko Kuroda.
After what Japanese government officials describe as “rapid and unilateral” moves, the yen, already at its lowest level in 24 years, could drop to 148 before the end of the year, analysts said.
Market participants say the recent rapid sell-off in the yen may be somewhat overdone, but the recent moves reflect economic fundamentals, a key factor for Japanese authorities.
As the US Federal Reserve is keen on continuing rate hikes to keep inflation under control and the BOJ is unlikely to budge for some time, a stronger dollar against the yen should persist, they added.
“A sense of vigilance has surely grown among the Japanese authorities. But the effect of the currency intervention is expected to be temporary at best and changing the overall trend will be difficult,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities Co.
“In that sense, the thought is that it’s better not to do anything ineffective,” Yamamoto said.
The prospect of a yen at its lowest level since 1998 is already giving Prime Minister Fumio Kishida a hard time. His government is trying to ease the pain of price-sensitive households due to inflation accelerating to a faster pace than the BOJ’s 2% target, albeit temporarily. A weak yen inflates import costs for resource-poor Japan.
Coming out of a meeting between the government and the BOJ on Thursday, senior Japanese diplomat Masato Kanda hinted at the threat to take action with all options on the table. He said the yen’s “excessively volatile” recent movements cannot be explained by economic fundamentals.
The strongest warning yet, however, did not halt yen selling.
For its part, the BOJ has repeatedly dismissed speculation that it will change monetary policy as rising foreign yields have added upward pressure on their Japanese counterparts. Kuroda, a former senior Japanese foreign exchange diplomat in the finance ministry, ruled out a short-term rate hike.
“Recent yen weakness is based on economic fundamentals. Japan has a trade deficit of around 2 trillion yen per month, and the pressure of Japanese importers selling yen is stronger than exporters buying yen,” said Takuya Kanda, senior researcher at the Gaitame.com Research Institute.
“So it’s an economic structure that weakens the yen as it is,” he said.
The real effective exchange rate of the yen against the dollar, which shows the strength of the purchasing power of the currency, has already fallen in July to its lowest level for half a century. It reflects the decline in competitiveness of the Japanese economy, whose potential growth rate is close to zero.
Even if Japan decides to step in, Kanda of the research institute sees a big hurdle before getting a green light from the US side and jointly entering the market by buying yen.
“If Japan goes it alone, the markets know there’s a limit to what it can do. It’s like playing the game with your cards up.
Japan’s foreign exchange reserves, used for purposes such as monetary intervention, fell to $1.29 trillion at the end of August, after hitting a record high of $1.42 trillion about a year earlier, according to Ministry of Finance data.
Japan last traded selling dollars and buying yen in 1998, amid the Asian financial crisis. The country was struggling following the bursting of the economic bubble, hit by a sell-off in Japan-linked assets, including stocks and the yen.
More than two decades later, the situation is different and Japan is not in crisis. The yen has come under intense selling pressure for what analysts consider to be legitimate reasons.
Japan is expected to lag far behind its global peers in monetary policy tightening. The European Central Bank hiked rates again on Thursday and financial markets are expecting a 0.75 percentage point rate hike from the Fed at its policy meeting in late September.
The rapid pace of yen depreciation may not be entirely positive for exporters, its perceived beneficiary.
The volatility makes it difficult for them to make business plans and sell the dollar for the yen at the levels they want, market watchers say. The assumed rate for the dollar-yen pair is around 119 yen for Japanese companies in fiscal year 2022, according to a BOJ survey.
“Rapid swings back and forth are not good (for businesses) because they can’t keep up,” said Yuji Saito, head of the foreign exchange department at Credit Agricole Corporate & Investment Bank in Tokyo.
Japan used to worry about a strong yen, which hit 75 to the dollar in 2011 in the aftermath of a major earthquake, tsunami and the worst nuclear accident since Chernobyl. Since then, Japanese companies have shifted production overseas and the boost to exports from a weak yen has waned.
Years of powerful monetary easing under ‘Abenomics’, an economic stimulus program spearheaded by the late former Prime Minister Shinzo Abe, have weakened the yen, seen as a blessing for exporters, a major driver of economic growth .
“Making the economy competitive is long overdue,” said Yamamoto of Mizuho Securities.